Plan ahead and pay as much as you can on your bond
After several months of consecutive repo rate hikes, consumers are waiting to hear whether the Monetary Policy Committee will offer some reprieve when it meets on 20 July to consider changes to the repo rate.
"Homeowners are understandably feeling the pinch and many are looking for ways to manage their bond repayments or reduce costs. While there is little that can be done to control fluctuations in the repo rate, there are ways for homeowners to help mitigate the impact," says Carl Coetzee, CEO of BetterBond.
Fixed or variable rates?
Most homeowners immediately consider the benefits of fixing their interest rate, so that it is not affected by changes in the repo rate. "Unfortunately, there is no right or wrong decision when it comes to fixing your interest rate. Each homeowner's financial situation is unique and various factors need to be considered when evaluating the benefits of both options."
Bear in mind that when applying for a home loan, it is by default on the basis of a variable interest rate. "Only once your bond has registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses," advises Coetzee.
Fixed interest rates are set for up to five years maximum which means that on a 20-year loan you will need to renegotiate the terms, and these terms could be less favourable than they were before. "Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time."
Peg your bond repayments
Another option is to peg your bond repayments at the current prime lending rate, says Coetzee. "If you have managed to pay your bond at the current prime lending rate by budgeting prudently and cutting back on other expenses, consider maintaining those monthly repayments even if the repo rate drops later this year. This will help you reduce your bond repayment period and save substantially on interest."
So, as an example, if you have managed to maintain your bond repayments on a R2 million at the current prime lending rate of 11.75%, continue doing so even if the repo rate drops taking the prime lending rate to 11.5%. By paying the extra R345 a month on your bond, you will be able to shave 13 months off your bond repayment period and save R217 171 in interest over this period.
"Bear in mind that the longer the loan repayment or amortisation period, the larger the influence a change in the interest rate will have on your repayments," says Coetzee.
Work with a bond originator
Buyers should remember that bond originators can apply to more than one bank on their behalf to secure a lower interest rate, or a rate concession. By approaching more than one bank, BetterBond is able to negotiate a better rate concession as the banks compete to offer the best deal based on the buyer's risk profile, says Coetzee. Banks determine this risk differently, which affects the rates concession each will offer.
"BetterBond's average interest rate concession when applying to, and negotiating with, four banks is 0.61% which, at the current prime lending rate of 11.75% could bring a buyer's interest rate down to 11.14%. This would reduce the monthly bond repayment on a R2 million home by R839 from R21 674 to R20 835.
"It's natural to want to take steps that will provide some buffer against possible future rate hikes, especially in our current economic climate. But remember, the determining factor when it comes to deciding on whether to fix the interest rate on your bond should always be affordability, irrespective of whether interest rates are going up or not," concludes Coetzee.